Morpho Midnight: The Future of Fixed-Rate Lending | Paul Frambot

**David Hoffman** (0:02)
Bankless Nation, we got Paul from Morpho back on the podcast talking about a new thing out of the world of Morpho called Morpho Midnight. We're going to talk about it and everything else is going on in the world of Morpho and Vault broadly. Paul, welcome back onto the show.

**Paul Frambot** (0:14)
Hey, thanks for having me again.

**David Hoffman** (0:16)
Paul, what is Morpho Midnight?

**Paul Frambot** (0:18)
Yeah, Morpho Midnight is basically the next version of Morpho after Morpho Blue. So Morpho, we're an infrastructure that allow people to earn interest on one end and get some financing on the other end. So we give you a stack that allows you to create some lending markets, right? In Morpho Blue, you could select one collateral, a loan asset, an oracle, and you had this variable rate open-term lending experience that was pretty convenient and pretty passive to get into. And we've done this for the last two years, but what we realized as we were talking to more and more institutions is that one thing was liking, it was control over the interest rate, right? Whether you're a consumer, a retail user of a large app like Robinhood or Coinbase, you want predictability on your rate, like you want to know how much you're going to pay.
But most importantly, if you're a large institution, you want control on the rate because you want to price the risk accurately, right?
It's actually not a thing in traditional finance to have your interest rates rely on arbitrary formulas or arbitrary governance, like it is the case in DeFi. And so basically, the combination of those two feedbacks made it obvious that the future of DeFi financing had to move away from the so-called interest rate model that we have today that basically dictates what the rate is going to be to a much more traditional way, which are zero-coupon obligation. So, long way of saying Morpho Midnight is like a fixed rate, fixed term, lending and borrowing infrastructure that allows you to build lending and borrowing markets that have a term and has a fixed rate.

**David Hoffman** (1:57)
And this, to me, this seems like Morpho is building financial infrastructure that is very ubiquitous in TradFi.
And in, you know, in Morpho and also DeFi broadly, we kind of built the things that made sense for us to build in the first place, like Aave, Morpho, Morpho, you know, Morpho Blue, things that don't really mesh well with TradFi, but do mesh well for retail participants. The AMM, for example, is just a retail-friendly phenomenon. And Morpho Blue is like the same thing. It's just like, yeah, like retail actually doesn't really care about stable interest rates. They just, you know, they're okay to be exposed to the market of whatever the market wants to pay them in that moment. And it can flex up, it can flex down. And that's just like not true for institutions. And so based off of your customer feedback from talking to institutions, I'm like, I'm sure they were like, we are looking for the form factor that we are familiar with. Please build it. And that's what Morpho Blue is.

**Paul Frambot** (3:01)
Yes, I think pretty much. I like the way you explain that is in the early days of DeFi, basically, you had multiple constraints. Gas was high.
And also the set of users that was interacting with the chains was basically users with their metamask wallet that had a little bit of money. And they were in no way financial experts, right? So basically, the protocols initially had to internalize a lot of the complexity in order to provide a passive experience to users, and they could not rely on any other intermediaries to do that. So this is why the early versions of Uniswap, for example, is passive both on the LP side and on the trader side, right? You can do passive LPs on Uniswap v2 and passive trading. This is why Compound or Aave manage the risk for you. They manage the rate for you. They manage everything for you, right? But as the ecosystem grows and the complexity of the players, they're more and more complex and understand, they want more control, right? And so as a DeFi protocol, you have an interest in modularizing some parts of your code and of the responsibilities that you have and leave it to the market, because the market will price it better and it will scale much more, because they'll be able to discover much more use cases. What does that mean in practice? In the case of Uniswap, they turn Uniswap v2 into Uniswap v3 that externalizes the LP, some of the LP management a little bit more.